Life Settlements & Senior Health Planning Accounts Explained.

What is a life settlement?

A life settlement is the sale of a life insurance policy to a thirdparty for a market value return.

Are life settlements legal?

Yes. Life insurance policies may be freely sold or transferred likeany other asset. Selling a life insurance policy is a protected property right of all Americans, recognized over a century ago by the U.S. Supreme Court. [1]

Are seniors well protected in a life settlement transaction through laws and regulation?

Life settlement transactions are highly regulated and subject to substantialconsumer protections. Comprehensive state laws regarding life settlements exist in 43 states, covering more than 90 percent of the U.S. population. [2] And those laws have proven effective— according to the National Association of Insurance Commissioners, there were only two reported consumer complaints involving life settlements filed with state insurance departments in a recent four year period. [3]

When should seniors consider life settlements?

Seniors may choose to sell their policies because they no longer need them, or they can no longer afford escalating premiums. Selling policies in a competitive and regulated life settlement market is often a far superior option to lapsing or surrendering policies back to the insurance company.

Life insurance policies remain a vastly underutilized asset. Sixty-five percent of seniors own life insurance, [4] but they often get little or no financial benefit from their policies.

According to the American Council of Life Insurers, in 2017, over 7 million individual life insurance policies, with an aggregate face value of over $500 billion, lapsed, for which policyowners received nothing. Over 1.5 million additional policies, with an aggregate face value of over $100 billion, were transferred to the issuer for cash surrender value. [5]

How do life settlements compare with policy lapses and surrenders?

The National Association of Insurance Commissioners stated in a 2017 report, “Policyowners who sell their policies receive a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy, according to government and university studies.”[6]

What is H.R. 7203?

H.R. 7203 is legislation introduced by House Ways and Means Committee members Rep. Kenny Marchant (R-TX) and Rep. Brian Higgins (D-NY) that would permit life insurance policyowners to use the proceeds from a life settlements to fund a wide range of health care costs, including long-term care expenses and long-term care insurance premiums.

H.R. 7203 would allow life settlement proceeds to be rolled over, tax-free, into accounts dedicated to funding permitted health care expenses. Distributions from the accounts would not be taxed if used for permitted expenses. Distributions used for unauthorized purposes would be subject to both income taxes and penalties. Amounts kept in the accounts, including investment earnings, would not be taxed during the lifetime of the account holder or such person’s spouse.

What is the current law and what would H.R. 7203 change?

Current law already permits life settlement proceeds to bepaid tax-free to persons who are terminally or chronically ill.[i] H.R. 7203 would permit policyowners to use those life settlement proceeds for current or future health care needs, but without having to wait until they are already very sick. Financial pressures, escalating premiums, and other concerns often force seniors to terminate their life insurance prior to that point.

How can H.R. 7203 help seniors?

H.R. 7203 would help seniors use assets they already own—their life insurance policies—from which they otherwise often realize no benefit, to pay health care costs in retirement. The NAIC, in a 2017 report,life settlements as “one option seniors might use to generate resources to pay for their long-term care needs.” H.R. 7203 would enable seniors to use more effectively assets they already own for home health, assisted living, skilled nursing, and nursing home care, which would give seniors greater choice in where that care is received.

How can H.R. 7203 help taxpayers?

H.R. 7203 would help taxpayers by increasing the use of private resources to pay for costly health care—including long-term care costs—thus deferring, or even eliminating the need for Medicaid, potentially saving taxpayers billions. Life settlements also generate greater tax revenues than other means of terminating or transferring life insurance. Because policyowners who sell their policies in life settlements typically receive far more than if those policies lapse or are surrendered, those additional proceeds may result in additional taxable income—policyowners would roll over only a portion of the proceeds into the accounts, and the remaining proceeds would be taxed. In addition, though most life insurance death benefits are excluded from taxable income, death benefits paid to purchasers in life settlements are taxed, which also would generate additional revenues.